Life Is Stranger Than Fiction

By: Kent Engelke | Capitol Securities

Life is stranger than fiction. Yesterday, the Trump administration asked OPEC to increase oil production by 1 million barrels to offset the lost production form Iran and Venezuela as well as capacity constraints in the US. According to Goldman, the current market is under-supplied by about 1 million barrels, thus suggesting a 2 million barrel shortfall is potentially expected.

Wow! Two months ago, many were postulating the glut will last into eternity.

Oil is a potential election issue and I believe crude over $75/barrel could be an issue in November.

Three months ago, many pundits were suggesting job creation was going to slow. According to yesterday’s JOLT survey, job openings are at an all-time high, vastly exceeding the consensus estimate.

The ISM Non-manufacturing Index – an index representing about 90% of the economy, was higher than expected, reaching a level last experienced in August 2005. The new order index surged to top the highest point since the July 1997 inception of this data point.

Input costs also rose more than expected, advancing to the second highest level since September 2012. Delivery times or potential measure of inflation is at the strongest reading since November 2005.

Inflation is defined as too much money chasing too few goods, fearing higher prices tomorrow. Thirty years ago, the above information would have sent oil prices surging and bond prices falling.

Yesterday, bond prices rose and oil prices were down for a large part of the trading session. The market is stuck on deflationary fears, the result of the environment of the last 10 years. Is this about to change?

Speaking about lack of change, the narrowness of the markets is continuing. The proverbial FAAMG stocks are dominating market performance. The combined values of these five companies are now an incredible $3.8 trillion, topping the GDP of Germany — the fourth largest global economy — and all of the companies in Japan’s Topix Index of stocks.

Value managers have abdicated and are utilizing Janusiam thinking to rationalize buying the FAAMG shares out of desperation for performance.

The only constant is change. Geopolitically, the changes are tectonic, changes that were not expected.

Market perceptions will again change, but the appropriate question is when?

Last night the foreign markets were up. London was up 0.40%, Paris was down 0.06% and Frankfurt was up 0.26%. China was up 0.03%, Japan was up 0.38% and Hang Sang was up 0.53%.

The Dow should open nominally higher as trade fears ebb. The 10-year is off 7/32 to yield 2.96%.

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